Wednesday, May 14, 2008

The economic and logical fallacies of the CPI(M)

Today's Economic Times has a piece by Suneet Chopra, the CPI(M)'s Joint Secretary of the All India Agricultural Worker's Union about the dangers of futures trading in commodities.

When we speak of ‘future trading’ in commodities, we are referring to a situation in which traders and hoarders buy out the producers cheaply and then raise prices by creating false scarcity.

Wrong on two counts - futures trading offers an iron-clad contract to the producer that his output will be purchased and that any investment he makes now towards the development of better crops can be recouped. Futures trading is not a legally required activity by the producers and in case they find the spot markets offer better returns, they would gravitate to this market.

In any case the farmers would get a better deal than what they are getting currently with the large chain of middlemen between the producer and eventual customer.

Mr. Chopra continues: A US senate panel has not only conducted an inquiry but has come to the definitive conclusion that the uncontrollable surge in crude prices — what with the Brent currently trading at over $120 per barrel spot price — is without doubt the outcome of Hedge funds having taken bets worth $12 trillion and more on oil futures.

It's interesting that Mr.Chopra has reached this conclusion on May 14, when the Wall Street Journal reports that the Senate committee is going to meet on May 21 - The House Energy and Commerce Subcommittee on Oversight and Investigations has scheduled a hearing for May 21 on gasoline prices, which will touch on the issue of possible market manipulation, according to the aide and witnesses. That would be the day after a planned Senate Energy and Natural Resources Committee hearing examining speculation.

However, I agree with the last line of Mr.Chopra's article: For the sake of the profit of a handful, the lives of the majority ought not to be put on the table of the futures casino.

If only the Communist Party could practice at home what they are preaching in public !

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